Here are the 6 Most Important Factors to Consider While Opting for A Systematic Investment Plan (SIP)

The concept of Systematic Investment Plans (SIPs), for many investors, is a difficult one to understand. And it’s not just the less experienced bunch of investors who consider it perplexing, even ace investors face difficulty in getting their SIP plans right. So, yes we understand you want to know how to make your SIP investment strategy work for you, but before that, it would be valuable for you to understand what SIP is all about. Let’s find out -

What is SIP?

SIP is a mutual fund investment plan that allows you to make a fixed amount investment but in a systematic or step-by-step manner. So, what you do with your total investible amount is that you break it down into smaller amounts to be payable on a monthly, quarterly or annual basis. Mutual funds invest this money in the markets driving home profits for you over time.

But to gain all such benefits, you must invest in the right SIP plan. Let’s, now, delve into the six major factors you need to consider before choosing a SIP plan best suited to your needs -

1. The objective of your investment -

Even before deciding on saving your money into schemes- whether SIP or otherwise, you should know why you want to invest. And to come up with an answer to this question, you need to ask yourself two basic questions. First, am I aiming at short-term or long-term goals? Secondly, how much risk am I willing to take? Your investment term and risk tolerance will tell you exactly which plan you should opt for.

For example, if you are someone who is apprehensive about taking risks and yet want consistent returns, debt funds are the option for you. However, if you don’t mind taking a little risk and are ready to wait for a considerably long time for the returns to come, then equity funds are where you should be investing.

2. Performance over the years -

Analyse every fund before deciding on whether or not they are right for you. And if possible, make a comparison of how they have fared over the last three to five years. A thorough comparison of the performances will definitely help you understand how stable or unstable a fund is, and whether or not it is strong enough to tolerate market volatility. The key is to stay away from funds that deliver well when the market is favorable and fail to perform when the market is difficult. While you make these observations, make sure you remain far sighted and consider a longer term of the investment.

3. Choosing the right fund house -

For people who don’t know what a fund house is, it is an asset management company that owns and operates the invested money in a mutual fund. A fund house is as important as the fund itself. And this is because every decision taken by a fund house impacts the investors. And not just that, their decisions can determine the growth a fund can attain too. You will end up being at a loss if your fund house doesn’t take the right decisions at the right time. And that is why it is highly advisable that you learn about the fund house you intend to associate with besides reading about the chosen scheme.

4. Keep the expense ratio in mind -

The expense ratio is basically the annual fee charged by a mutual fund company, which includes administrative as well as management fees. One thing that needs to be kept in mind while looking at a fund’s expense ratio is that while a low expense ratio is desirable, a high expense ratio may cause a fund’s performance to waiver.

5. Is the exit load too high?

Entry load is the fee charged by a fund when an investor makes an entry into it. Earlier, it used to be charged, but now Securities and Exchange Board of India (SEBI) has put an end to this practice. As a result, an investor doesn’t pay when he becomes part of a fund, he pays only when he redeems it. Make sure this exit fee, also known as the exit load, suits your budget.

6. Selecting the right type -

There are different types of mutual funds suited to different financial needs. While some of them are structure based, others happen to be asset based. Choosing the right type of mutual fund is important for getting favorable returns upon the completion of the investment time period.

The bottom line is that, with these thumb rules followed to the letter, you can make the right SIP choice for a more efficient investment portfolio. Happy investing!

Mr. Ajay Kumar Jain, M.Sc, Chief Managing Director Being the Chairman cum Chief Managing Director, he focuses on holistic investment planning and wealth management and tries to make investment planning simpler for retail and HNI investors. Investor education is one of the prime things that Mr. Ajay Jain focuses on as he believes financial education is the foundation of successful investing. With over two decades of experience, Mr. Jain has made a mark in the Indian mutual fund industry due to his compassion and sheer hard work.